The industry believes that the new principles will implement big instability to the c/e ratio in annual (or quarter-to-quarter) checks. The problem is, not only would this make period-to-period comparisons significantly more difficult, but it would also stop comparisons to statements calculated under the former standard.
Insurance Companies are demanding the Canadian government to change the accounting rules in their direction. In summary, insurers would like an amendment of the standards which our main regulator has already agreed to comply with but plans to effect no sooner than 2013. The industry believes that the new principles will implement big instability to the c/e ratio in annual (or quarter-to-quarter) checks. The problem is, not only would this make period-to-period comparisons significantly more difficult, but it would also stop comparisons to statements calculated under the former standard. LSM Insurance think the latter is a weak plea though, as the insurers would most possibly be asked to re-calculate recent few periods' outcomes using the brand new regulations precisely for the reason of rational benchmark, as is the case with most changes of the standards. However, a shift of rules will absolutely mean bigger amount of administrative costs during the transition at the bottom end. As to the volatility of capital, the Financial Post reports that the insurers are proposing a 2-layer accounting environment that permits capital to be assessed based on a various pack of rules than the International Financial Reporting Standards. This does make sense because the levels of capital reserves are checked and regulated by the OSFI. Should there be too big instability of capital reserves, the insurance companies may be subdued to modify them more often which avoid ideal capital management. In extreme cases, insufficient capital may push OSFI to regard an insurer bankrupt. Today, it is unworkable to describe the exact result of International Financial Reporting Standards on c/e instability, as the new rules are still under development by the International Accounting Standards Board. However, the insurance companies are believing that 2-layered regulations, which are in place in the US and the UK already, will downgrade any such concerns. (Picture courtesy of TW Collins.)
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AuthorLorne S. Marr, president of LSM Insurance. 17 years of experience in insurance business. Archives
January 2012
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